This Bank Stock Might Be a Bargain at Current Prices

Alex is a member of The Motley Fool Blog Network -- entries represent the personal opinion of the blogger and are not formally edited.

Banco Santander (NYSE: SAN) has been used -wrongly- as a proxy for the Eurozone economy since the beginning of the European debt crisis. Once hailed as one of the best banks in the world (and with a stock price in the low-20s), it has now been severely beaten down (its stock price is lower than $7). However, the market seems to ignore that SAN gets less than 20% of its earnings from troubled Spain and Portugal. It is in Brazil and other high-growth Latin American countries where the Bank gets most of its profits. As one of the strongest survivors of the 2008 financial meltdown (the bank's exposure to the American subprime market was very low), Santander went on a shopping spree, and expanded aggressively around the world (Brazil, Chile, Poland, Mexico, US, UK...). SAN is therefore not just a "Spain play" anymore, it's a world play. So should bargain-hunting investors buy this stock now? Or could it actually become a value trap?

Valuation Ratios

With regards to valuation, the stock is currently trading at a P/E of 9.59, lower than the group's average of 16. Furthermore, the P/E is calculated based on reported earnings from a quarter in which the bank had to account for millions and millions in reserve funds, so the real P/E is likely to be much lower. In fact, the forward P/E is an even more attractive 8.30, though I suspect future earnings will surprise many bearish investors who have wrongly tied the bank to the Spanish economy. When factoring in growth, the PEG ratio of just 0.46 also paints a bullish picture for the stock, and so does the 0.73 P/B ratio. Almost all of these ratios are more attractive than those of Santander's main competitor, Banco Bilbao Vizcaya Argentaria (NYSE: BBVA), which has nonetheless had slightly better stock performance than Santander over the past few years.

<table> <tbody> <tr> <td> </td> <td><strong>P/E</strong></td> <td><strong>Fw P/E</strong></td> <td><strong>P/B</strong></td> <td><strong>PEG</strong></td> <td><strong>Avg Rec</strong></td> <td><strong>ROE (ttm)</strong></td> <td><strong>Avg PT (%implied upside)</strong></td> <td><strong>Div Yield</strong></td> </tr> <tr> <td><strong>SAN</strong></td> <td>9.59</td> <td>8.30</td> <td>0.73</td> <td>0.46</td> <td>3.00</td> <td>6.96%</td> <td>$8.71 (+28%)</td> <td>12.88%</td> </tr> <tr> <td><strong>BBVA</strong></td> <td>15.37</td> <td>5.38</td> <td>0.89</td> <td>2.16</td> <td>3.00</td> <td>5.74%</td> <td>$10.10 (+15.17%)</td> <td>6.13%</td> </tr> <tr> <td><em>Edge</em></td> <td><em>SAN</em></td> <td><em>BBVA</em></td> <td><em>SAN</em></td> <td><em>SAN</em></td> <td><em>Tie</em></td> <td><em>SAN</em></td> <td><em>SAN</em></td> <td><em>SAN<br /></em></td> </tr> </tbody> </table>

Analyst Ratings

Analysts are mostly neutral on the stock. The average recommendation is 3.00 (hold), but the average price target of $8.71 implies that the stock has an almost 30% upside from current price levels. Furthermore, it must be noted that price targets also take into account 'general sentiment' for the stock, and for the group the stock is in: Euro-zone banks have been essentially financial pariahs for  the last couple of years, so analysts might have a tendency to undervalue their potential when assigning price targets.


Santander pays a whopping $0.21/share, which works out to a yield of almost 13%. The bank has been paying a dividend to its ADR shareholders since the late 1980s. Even during the worst months of the financial meltdown, the bank did not question its dividend, and did not reduce it either. Yields in the teens are not common, especially among financial blue-chip stocks like Santander, so this could be a historical anomaly of which savvy dividend-seeking investors could take advantage.


Investing in the stock is not without its risks. The biggest problem the bank faced was its portfolio of Spanish real estate, which dropped in value after the Spanish real estate bubble bursted, putting many Spanish lenders in danger. However, the bank has been able to dramatically decrease its Spanish real estate holdings from 41 billion in late 2008 to just under 13 billion in late 2012. Santander has now enough reserve money to comfortably survive a dire economic situation in Europe. In fact, it has a core capital (Basel's Tier 1 capital) of over 10%, which places the bank at the top of Western European banks. Santander has been able to not only meet but exceed regulatory requirements in such a way through a combination of retained earnings from abroad and asset sales in more vigorous European markets.

At any rate, despite the bank's smart handling of its troubled real estate portfolio, the bank's exposure to European economies (mainly Spain and the UK) means that Santander will have to face the challenges of these mature, struggling, markets: slow demand for loans, economies under pressure, low-interest-rate environments and high cost of liquidity. However, Santander's CEO, Alfredo Saez, while acknowledging the challenges, also believes that the leading banks in these markets "have a great opportunity to create value in the medium term: to recover attractive profitability, gain market share and become large generators of capital.”

Bottom Line

There is no doubt the market has savagely beaten down Euro-zone banks, especially those headquartered in Spain: Banco Santander's stock has lost almost 70% of its value since 2008, and, due to the recent Cyprus turmoil, the stock is down about 16% YTD. However, investors are wrongly using the bank's stock as a proxy for the Spanish economy, when, in reality, less than 20% of the bank's profit is linked to it. Very attractive valuation ratios, healthy earnings, an aggressive -yet strategically sound- expansion, strong exposure to Latin American growth, and future growth opportunities help paint a very bullish picture for this stock. However, investors should bear in mind that bad news from Europe will continue to put the stock under pressure, but I believe its price already bottomed, and should start to recover as investors realize how drastically undervalued the stock currently is. There is no guarantee this will happen in the following months, but, even if it takes the stock a bit longer to recover, investors should be able to enjoy the juicy dividend in the meantime.

Alex Bastardas is long on SAN. The Motley Fool has no position in any of the stocks mentioned. Try any of our Foolish newsletter services free for 30 days. We Fools may not all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. The Motley Fool has a disclosure policy.

blog comments powered by Disqus